Oil price fluctuations could result in smaller credit lines for drillers.
Oil price fluctuations could result in smaller credit lines for drillers.

For many oil producers, April is similar to report card season at elementary schools. But instead of letter grades and the threat of parental disappointment, exploration and drilling companies have billions of dollars at stake. From the looks of things at the moment, the end of March and early April could be a make-or-break period for oil prices and the financial health of producers.

Bloomberg explains that April is the month when many banks will begin reviewing the credit lines extended to their oil and gas clients. Unfortunately, the performance of the oil market since the start of the year might make this a more stressful time than usual for many explorers and drillers.

Since OPEC made official its plans to cut back on production, the price of oil has remained volatile. Crude futures quotes reached more than $55 per barrel in January according to Nasdaq, giving producers a fresh wave of optimism. In response, many new oil rigs and projects were initiated. But since January, Bloomberg reported, oil prices have fallen about 14 percent. As of March 22, contracts for West Texas Intermediate crude for May delivery were trading at $47.59, while Brent futures slid below $50 for the first time since November 2016.

Bloomberg sources said this price rout couldn’t have come at a worse time for producers, many of which will have their credit lines reevaluated and possibly downgraded. This would put additional strain on an already embattled industry as it plans to ramp up spending and production capacity. According to a report from Wood Mackenzie, oil producers as a group plan to spend about $25 billion more this year than in 2016. Individual firms said they planned to increase expenses by nearly 70 percent in some cases. Much of those plans, however, are dependent on the amount of credit banks are willing to extend.

While crunch time is imminent for producers, most analysts agree any credit cuts won’t be as drastic as those seen last year, when crude prices bottomed out around $30 per barrel. In that instance, some corporate credit lines were reduced by more than 30 percent. Since then, drilling firms have prioritized lean operations and made sweeping moves to cut costs. Bloomberg noted that many even sold off assets like equipment and financial instruments just to keep the lights on.

Breaking point

While price volatility may now be arriving at a particularly bad time, the oil industry is certainly familiar with the phenomenon. That’s why many analysts are still hedging their doomsday predictions, since this is a problem of both perspective and expectation.

For one, the process of evaluating credit lines is hard to predict. One source told Bloomberg that it could be considered “a combination of art and science.” That means the $45 breaking point is more of a symbolic number rather than a discrete threshold. Banks may react only slightly or not at all if oil prices did continue their downward slide below this level.

In addition, history provides a less alarmist picture of the situation. In 2015, according to Bloomberg, crude prices were in free fall as the year drew to a close. Banks, however, only made small changes to their oil and gas credit lines in response. This goes to show, once again, that little is certain when it comes to upgrading credit risk, but according to a source with Bloomberg, banks would need any telltale sign they could get if they were going to be persuaded not to panic.

Oil prices look to be in a downward spiral now, but conditions could still improve in time to give creditors a fresh wave of optimism. Production from North American drilling projects has already proven its ability to stand up to OPEC price manipulation. And now that summer is just around the corner in the U.S. and elsewhere, drivers will be logging more miles and demanding more fuel, sending prices on an upward trajectory.